Don’t Upset Your Insurer

“You mentioned that earlier too,” said Josh. “What is a Sum Insured policy? How’s it different?”

“Full Replacement covers,” replied Rosh, “as their name suggested, gave you a new for old house of similar size and quality if the damaged home couldn’t be repaired fully.”

“The insurer covered you to completely rebuild your home with a replacement without any dollar value limitation. But in Sum Insured policies, home insurance is capped by a maximum dollar amount.”

“Who decides the Sum Insured amount?” asked Josh.

“You do now,” Rosh snorted. “It's now your job as policyholder to set the Sum Insured amount, even though you are generally less well-equipped than the insurer at deciding an appropriate value.”

"But isn't it more reasonable that you decide the value of your own house?" asked Josh. "After all, you know what kind of house you've got, rather than someone sitting miles away in their office, who'll never come out to inspect it."

"Does knowing what kind of house I live in qualify me as a registered valuer or a builder?" Rosh retorted. "The reason insurers moved to 'Sum Insured', was because they got Christchurch terribly wrong with 'Full Replacement'."

"If they, who have been in this business for years and have all the data, stats, expert opinions and sophisticated valuation tools, can get it so wrong, spare a thought for the chances of the poor bugger on the street who has neither any clues nor any resources."

“Only the insurer has reasonable competence in accurately calculating rebuild cost. They alone, have actual first-hand experience with all kinds of damage claims, and are involved in all aspects of a claim payout/repair on a day to day basis.”

“They have historic nationwide information, updated with every single claim they pay, and have existing/ongoing relationships with all parties involved in the construction industry.”

"They should decide the 'Sum Insured'. But by passing the responsibility of doing that onto the insured, they've saved their butts. There can be no comeback on them later. But have they really given away control by letting consumers make this decision themselves? No."

“A Sum Insured sets a ceiling on the dollar amount your insurer will pay if your home gets destroyed. If it costs more to rebuild your home than you've insured it for, you’ll need to pay the difference yourself.”

“But if you insure the property for too much and the rebuilt cost is less than your Sum Insured, you don’t get a refund. So you’ve got to get it Goldilocks right every year, or you’ll keep losing - either through extra premiums paid or through capped payouts when things go wrong.”

“The insurer does not need to pay out any more than the actual cost to rebuild the home in a Sum Insured Policy. Result - Heads they win, tails you lose."

“That’s sad!” exclaimed Josh. “I would never over insure. And surely, the Bank wouldn’t allow people to underinsure.”

“Banks only ever offer an opinion now,” said Rosh. “Not give advice. All they care about is that your sum insured is more than the amount of your mortgage.”

“Can’t you can hire independent experts to get an accurate valuation every year?" asked Josh.

“It’s cheaper and better to over insure than to do that,” Rosh laughed. “If I’m unsure about my rebuild costs, or want to include a risk margin for future increases in repair or rebuilding costs, I’d just buy additional cover and increase my sum insured instead.”

“An extra $2 a week for an Auckland 3-beddie will buy me more than $200,000 of extra cover at the moment with most insurers. Its valuation anywhere will cost me at least $500.”

"Regardless of who or how much you pay to get your Sum Insured calculated, valuers, architects, builders or quantity surveyors can’t generally be held accountable for the figures they provide. Their valuations come with disclaimers.”

“At least the people will still get a reasonably accurate property valuation for their money,” Josh offered, “if they pay to use an independent expert. They could even use it to get refinance, if needed.”

“Not really,” said Rosh. “Sum Insured is different from the market or government value of the property. It is just an indication of what it might realistically cost to replace the building.”

“That’s not a valuation in the sense you mean. Sum Insured only takes into account how much it would cost to rebuild the home. It doesn’t take into account other factors like location and land value.”

“You'll also need to consider things like the cost of demolition or clearing of the section, the nature of the land your home is built on, the materials used on the property and the size of the home etc.”

“There are online calculators to guide people through the process of setting their Sum Insured, but most are a guesstimate at best, as they do not take into account things like floor coverings, ie., carpets etc.”

“Tenanted properties are generally more at risk than owner occupied properties. So they are more likely to incur losses due to negligence or deliberate damage.”

“This means that a landlord must not only get his Sum Insured and Excess right, he must also ensure that his cover includes things like malicious damage by a tenant and loss of rent due to damage by a tenant etc., things not included in online calculators.”

“So, reading the small print is vital. The big print giveth. The small print taketh away.”

“Lawyer Andrew Hooker recently described an interesting case. A customer of one of New Zealand’s largest domestic insurance companies had a major fire."

"During his claims process, there were a number of disagreements about what should be paid for various items, but the customer held his ground.”

“He insisted on the insurance company honoring its obligations fully. Eventually, the insurer conceded and paid as the policy required.”

“After the claim was settled, the insurer wrote to him cancelling all his insurance policies. Why? Because it could. And perhaps because he had been difficult, although no other reason was given.”

“Yet again, when this customer tried to obtain insurance elsewhere and told them that his insurance had been cancelled, no other insurer wanted to know him. He remains uninsured to this day.”

“Why? Just because his insurances had been cancelled, and he is required to disclose this to new insurers.”

“It didn’t matter that the cancellation had nothing to do with dishonesty, and he had done nothing wrong except for holding the insurer accountable for their own policy wording.”

“Perhaps that is a bigger problem than dishonesty,” Josh mused aloud. “Couldn’t he go anywhere else for help?”

“There is no legal remedy,” replied Rosh. “The insurance industry is free to insure or refuse to insure who it chooses, and to cancel any policy it chooses.”

“There is no insurer of default in New Zealand. The insurance industry is entirely privatized, and by world standards, very under-regulated, according to Andrew.”

“The insurers seem to exhibit cartel like behaviors. Prices vary between them, but generally not by much. What one insurer does, the others follow.”

“They can act as judge, jury and executioner. Their heavy handed actions can ruin the lives of the very people that pay their premiums.”

“Ruined because of a slip. Ruined because an allegation was made. Or ruined because someone dared demand that their contract be respected.”

“In which other industry does a mere accusation have such a draconian effect on someone’s life? Governments can legislate, but regulation and compliance only generally increases costs.”

“So beware! Don’t upset your insurer. If you do, your insurance may be cancelled. If it is, you may never get insurance elsewhere.”

“Without insurance, banks won’t lend you money. Without insurance, you may not be able to do business, protect your assets, or even drive on the roads… ”

‘Is that why there were a lot of non-insured homeowners in NZ, as revealed after the Christchurch quake,’ Josh wondered.

Note: Interesting developments since this story:

In October 2014, Tower reinstated full replacement cover for damage caused by fire only.

In February 2015, Vero launched SumExtra, covering customers for full-replacement for non-natural disasters only (eg., fire, storm or flood, but acts of war and acts of terror remained excluded). If their home got destroyed in a natural disaster (i.e., acts of God, like earthquakes) and their sum insured was found insufficient, they were to receive Sum Insured + up to 10% extra payout.

In June 2015, a Treasury report stated: Sum insured has contributed to up to 85% of New Zealand homes being under-insured by an average of 28%. Worth $184 billion, this level of under-insurance is a real issue across New Zealand.

In September 2016, AA Insurance (AAI), which is a part of Vero, reintroduced total full-replacement for non-natural disasters only, even where it costs more than the sum insured. It maintained that it is still ‘untenable to extend full replacement to natural disasters’. Vero said it still had no plans to return to ‘open ended full replacement policies’.